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The unitary patent - an economic view

Whilst much has been written about the unitary patent (UP) in the last year, comparatively little attention has been given to the cost of holding a UP, or the economic advantages – or disadvantages – of doing so compared to holding conventional European patent (EP) bundles of national patents. However, estimating their relative costs is essential, because patent renewal fees can amount to 50 per cent or more of the lifetime cost of a patent.

One reason for the limited discussion to date is that the annual renewal fee for the UP has not yet been set; but as this article will show, it is possible to predict the fee with some confidence, and also identify some issues with the fee that may affect your decision whether to adopt the UP.

The business case for the UP can be summarised as whether it will cost more or less than your current EP renewals, coupled with the considerations that if it costs more, whether you get anything of extra value to mitigate this, whilst if it costs less, whether you still get the protection you need.

Costs

The level of the renewal fee of the UP is governed by Article 12(3) of the Council Regulation on the Unitary Patent, which states that the fee will be “equivalent to the level of the renewal fee to be paid for the average geographical coverage of current European patents”.

The average geographical coverage of European patents can be gleaned from various recent studies, such as the Study on the quality of the patent system in Europe (see useful links below), which produced a percentage breakdown of the number of European Union (EU) states validated and renewed in for at least one year.

On this basis, the average geographical coverage of current European patents isfive states.

Coincidentally, this also represents a broad division in validation patterns between electronic and mechanical industries on one hand (typically validating in five or fewer states), in contrast with chemical and biological industries (typically validating between five and 15 states) together with the pharmaceutical industry (typically validating in around 10 or more than 20 states).

A crude economic reason for this difference in behaviour relates to the markets they sell in. At one end of the spectrum, the electronic and mechanical industries typically sell to a pan-European market with little effective regulation. Validating in the three or five EU states with the highest gross domestic product (the top five hold in the order of 60- 80% of EU gross domestic product (GDP) will thus have a chilling effect on competition EU-wide and protect a large proportion of their income. This effect is strengthened further where there is any standardisation or interoperability feature in the product.

Meanwhile at the other end of the spectrum the pharmaceutical industry in particular is more likely to see each state in Europe as a separate market with an incumbent major client in the form of a national health service, and/or a medically driven consumer demand that is less sensitive to GDP. National regulations on products and labelling can also effectively fragment the market. Validating in just a few states therefore has less of a chilling effect on competition in the remaining states, and so a broad validation strategy is advisable. This suggests that if the UP renewal fee is set at the equivalent of five national renewal fees, then it will typically be more expensive for electronic and mechanical industries than under current EP practice, whilst for pharmaceutical industries, and to a lesser extent chemical and biological industries, the UP will be considerably cheaper.

In fact, in practice the effective cost of the UP will be more than five renewal fees, for one simple reason: out of the top six economies of Europe, three will not be participating in the UP. Spain and Italy have refused to participate, whilst Turkey is ineligible because whilst it is an European Patent Convention (UPC) contracting state, it is not a member of the EU.

Consequently, if one normally validates in the top five EU Economies of Germany, France, Great Britain, Spain and Italy (costing five renewal fees), then to replicate this coverage using the UP one must validate the UP itself (costing five renewal fees) plus the nonparticipating Spanish and Italian validations (costing a further two renewal fees).

Hence from a cost perspective, the UP only breaks even compared to the existing EP scheme once the number of states participating in the UP, which you normally validate under the EP scheme, exceeds the equivalent number of states at which the UP renewal fee is set.

Due to the non-participating states mentioned above, this means that for typical validation patterns, the UP only breaks even if you normally validate in eight or more EP states.

There are two take-home messages from the above analysis: 1) When announced, the headline renewal fee for the UP may not fully reflect the cost of maintaining a typical European portfolio; this will depend on your existing validation preferences. 2) Interested parties should lobby immediately for Article 12(3) to be interpreted as meaning that the UP renewal fee should be set equivalent to the geographical coverage of current European patents in the subset of states actually party to the UP as of the date of ratification. This will reduce the cost impact of Spain, Italy, Turkey, and others not participating.

Finally, as an aside, it’s worth noting that the one-off costs at grant are likely to be roughly the same for both schemes, with the reduction in attorney fees from fewer validations being offset by a likely increase in translation costs and printing fees from the European Patent Office (EPO) due to the requirement to fully publish the granted patent in English and one other EU language.

Having discussed costs, we can now briefly address returns and risks.

Returns

For applicants who normally validate below the UP break-even level, then if you opt for the UP despite the greater cost, will you see greater rewards? Typically in this scenario you will obtain a wider geographical coverage within Europe than previously – but so what? Unless you have the intent and means to exploit the patent in the additional territories, this extended coverage is academic. In addition, if your original validation strategy targeted or encompassed the top six or so economies of Europe, then the lower GDP states added by the UP may represent diminishing returns that make the costs, complexities and risks of pursuing revenues there even less appealing.

Hence unless you intend to actively pursue new revenue streams from additional states, to the extent that this offsets the cost of using the UP in your portfolio, then there is unlikely to be a mitigating return on your investment.

Risks

Meanwhile, for applicants who normally validate above the UP break-even level, then if you opt for the UP to save costs, are you getting the same quality of protection?

The primary concern here is the unitary nature of the protection. This means that there is a risk of central revocation causing a loss of all rights within UP member states. Moreover, you are obliged to use the currently untested Unified Patent Court (UPC), with no opt out possible. This adds further uncertainty to the risk.

As a result, for essential patents the risk of centralised revocation is likely to outweigh the savings of the UP renewal fees. Ironically it is the pharmaceutical and biochemical industries (where substantial UP renewal fee savings are most likely) that have the highest proportion of actual or potential essential patents, due to products tending to comprise a single active compound rather than an assembly of independently protectable components.

Conclusions

The combination of cost deterring typical electrical and mechanical applicants, and risk deterring typical pharmaceutical and biochemical applicants, appears to limit the appeal of the UP among most of its target audience. However, it is possible to improve matters; electrical and mechanical applicants should consider actively lobbying now to set renewal fees at a sensible level that would be attractive to them. Meanwhile, steering portfolio management towards identifying a cost/risk threshold for using the UP could allow it to become a useful means for cost effectively warehousing the long tail of a pharmaceutical applicant’s portfolio. Clearly, tactical considerations may also override economic considerations based on mere costs. For example, where possible having a mix of unitary and EP bundle patents may provide an ideal combination of enforcement strength and defensive resilience that is better than adopting either scheme alone.

Once the renewal fee is announced, together with any indication of how it may change as new states join the scheme, we will return to this subject with an update. In the meantime, your usual D Young & Co advisor will be happy to discuss how your current validation practice would be affected by using the UP. You may also wish to view our dedicated UPwebsite page atwww.dyoung.com/unitarypatent for the latest UP and UPC updates.